Europe’s biggest problem now is youth unemployment – we should be looking at the German labour model

These days we tend to talk about the divisions in Europe as one between net creditors and debtors. In reality this is just a sideshow. There is a much more fundamental gulf, hinted at by Angela Merkel in her Davos speech yesterday: between countries with organised industrial training systems such as Germany, the Netherlands, Belgium, Scandinavia, Austria and Switzerland – all currently with jobless rates of between 3% and 7% – and those with much higher rates of unemployment, often in double digits, in peripheral Europe.

The issue pits Anglo-Saxon precepts of free market regulation against the Germanic “Rhineland” system of managed capitalism, with modern apprenticeship systems built on a long-term compact between labour and employers. In the years before and immediately after the euro’s birth in 1999, the peripheral countries of the European monetary union (Emu) often followed Anglo-Saxon principles by liberalising parts of notoriously inflexible labour markets. “Hire and fire” became the motto.

Initially this seemed to work. But as debt market conditions worsened and growth stalled after the 2007-08 financial crisis, Emu’s periphery has been left seriously exposed by the failure to replace unproductive regulations with new mechanisms to generate jobs.

In the battle between rival systems, “Rhineland capitalism” appears to be winning hands down. In the two years since the global economic downturn in 2009, Germany has expanded employment by 1.8m, while the UK, US, France, Italy and Spain have shed 7m jobs. In 2007, when most other countries were nearing the end of a boom driven by excess credit, Germany had the highest unemployment rate (8.7% of the workforce on a harmonised basis) of the group of seven leading industrialised countries. Yet in late 2011, according to OECD figures, German unemployment, at 5.2%, was the lowest in the G7 apart from Japan.

While the UK struggles with record youth unemployment, Germany’s youth unemployment rate is one third of the OECD average and one eighth of the rate in Spain. High youth unemployment is the most pressing problem in Europe right now – Merkel acknowledged as much when she admitted that mere austerity would make the European project meaningless for the next generation of young people. “Structural reforms that lead to more jobs are essential,” she said in her opening statement.

But Merkel is drawing strength from Germany’s own experience with low unemployment in the mid-noughties, and she is right to do so. While the German labour market underwent some Anglo-Saxon-style deregulation under Gerhard Schröder in 2003-2005, it still places more emphasis on employers’ freedom to build long-term loyalty between employers and workers. These relationships are embedded in a strikingly different cultural approach to industrial training, closely tied to the German tradition of family-owned Mittelstand businesses buttressed by long-term savings that take a generational approach to assembling skills and technology.

British politicians are keen to talk about “skills”, but at the same time they are reluctant to let go of the flexible labour laws that have set them apart from the European mainland in the past. They can’t have it both ways. Employers who do not have a sense of social responsibility for training are unlikely to be durably persuaded to hire apprentices through one-off state payments. Instead, governments should consider building comprehensive vocational training schemes that could be funded through a reduction in the social costs ensuing from unemployment. Tinkering with apprenticeship programmes on a piecemeal basis, as has been done in the UK, is unlikely to yield long-term results, as such half-hearted reforms result in expensive and wasteful systems that lack both scale and content.

And it’s not just the German system of apprenticeship schemes that could do with being copied. One of the main reason why Germany’s economy was able to recover so quickly after the downturn was the system of short-time working support (Kurzarbeit), introduced in the 1920s and extended in recent years.

Funded by an employment insurance levy, it pays for firms to keep workers for six to 12 months, provided employers can show their businesses are in a cyclical and not a structural downturn. Imagine a small engineering firm that ran into financial trouble in 2008: rather than letting go of the 17-year-old apprentice who had recently joined the firm, it would have been able to keep employees on board and then benefit from their experience when the economy was back on its feet. Even if the company had gone bust, the apprentice would by law have been sent to another company.

Sir Anthony Bamford, chairman of UK excavator maker JCB, points out that his company was forced to shed more than 20% of staff in Britain when production halved in 2009. By contrast, the Kurzarbeit system enabled him to keep all his labour force in Germany.

Such examples underline how Germany’s previously unfashionable model has enabled it to become the industrialised world’s premier job machine. As the economic climate darkens, 2012 will be a difficult year both for Germany to hold on to its advantages and for other countries striving to follow the German lead. Yet unless they start to lay the groundwork for longer term gain, time for catching up will soon run out.